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Can Bankruptcy Help with Tax Debt?

July 10, 2020

Bankruptcy can help you alleviate the stress of overwhelming debt, but it is not a magic wand. There are some debts that bankruptcy will not eliminate, and tax debt falls into that category.  Like alimony, child support and college loans, most tax debt will survive bankruptcy, whether you file for Chapter 7 or Chapter 13. Of course, there are exceptions to every rule, so let’s look at when bankruptcy can help you get out of paying your tax debt.

If you’ve filed for and qualify for a Chapter 7 bankruptcy, your tax debt will qualify for discharge under very specific circumstances. These circumstances are:

  • Your tax debt must specifically be for unpaid income taxes. Other types of tax debt, including penalties for tax fraud, cannot be discharged, and;
  • Your tax debt is not a result of willful evasion such as using false identity information or filing a return that contained false information, and;
  • Your tax debt must have aged at least three years before your bankruptcy filing, and;
  • You actually filed a tax return reflecting the amount of tax that you owed, and it must have been filed at least two years before your bankruptcy filing, and;
  • The IRS has either assessed your income tax debt at least 240 days prior to your bankruptcy filing or has not assessed it at the time of your bankruptcy filing.

All of these elements must be present in order for your tax debt to be eligible for discharge in bankruptcy under Chapter 7 bankruptcy.

Before moving forward with bankruptcy in hopes that it will discharge your tax debt, it is important that you understand the difference between debt and a federal tax lien. A lien describes a legal action that has already been taken by the IRS to lay claim to funds in your bank account or on your income in response to your debt. If this action has already been taken and a lien exists, your bankruptcy will not discharge that established debt. You will have to pay it off, usually by selling some of your personal assets.

If you have outstanding tax debt and would like more information on how a bankruptcy might or might not help, contact us today to discuss your situation.

 

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